The April 2004 Senior Loan Officer Opinion Survey on Bank Lending Practices
addressed changes in the supply of, and demand for, bank loans to businesses
and households over the past three months. In addition, the survey
contained a series of questions on residential real estate loans and a
question on changes in banks' pricing and investment behavior in light
of declining net interest margins. Responses were received from fifty-six
domestic and twenty foreign banking institutions.

Both domestic banks and U.S. branches and agencies of foreign banks
indicated that they had eased lending standards and terms for C&I loans
over the past three months. Domestic banks also eased lending standards
on commercial real estate loans over the same period, while standards at
foreign institutions were little changed. The share of domestic banks
reporting stronger demand for C&I loans in the April survey was notably
larger than in the January survey. Demand for commercial real estate
loans at domestic banks also strengthened on net. By contrast, foreign
institutions reported slightly weaker C&I loan demand, on net, and
indicated that demand for commercial real estate loans had not changed.

In the April survey, a small net fraction of domestic banks reported
having eased lending standards on residential real estate loans, but standards
and terms for consumer loans were generally unchanged. On net, demand
for residential real estate loans was little changed, while demand for
consumer loans had strengthened.

Lending to Businesses

(Table 1, questions 1-8; Table 2, questions 1-8)

Both domestic and foreign banks reported having eased lending standards
on C&I loans over the past three months. Over 20 percent of domestic
banks, on net, indicated that they had eased standards for large and middle-market
firms, the largest share doing so since the beginning of the 1990s, and
a similar fraction noted having eased standards for small firms.
The net share of U.S. branches and agencies of foreign banks that reported
having eased lending standards for C&I loans jumped to 30 percent in
the April survey, up from 10 percent in the January survey.

Both domestic and foreign institutions also indicated that they had
eased many terms on C&I loans over the past three months. On
net, almost 40 percent of domestic banks reported having narrowed spreads
of loan rates over their cost of funds for large and middle-market borrowers
in April, up from 27 percent in the previous survey, and 26 percent had
done so for small firms. About 35 percent of foreign institutions
indicated that they had reduced spreads on their C&I loans, compared
with 14 percent in January. Survey respondents, on net, continued
to report having eased terms on credit lines, both by increasing the maximum
size of these lines and by reducing their cost. Furthermore, about
one-fifth of domestic and one-fourth of foreign banks said that they had
eased loan covenants over the past three months.

About 80 percent of the banks that reported having eased standards and
terms on C&I loans in the April survey cited more aggressive competition
from other banks or nonbank lenders as the most important reason for having
done so, roughly the same percentage as in the previous survey. Domestic
banks that had eased standards and terms also pointed to a more favorable
economic outlook and improvements in industry-specific problems, as well
as an increased tolerance for risk. The few domestic banks that had
tightened standards or terms generally cited a less favorable economic
outlook or a reduced tolerance for risk.

C&I loan demand. On net, 29 percent of domestic
banks reported in the April survey that the demand for C&I loans from
large and middle-market borrowers had increased, the largest share doing
so since 1998. About 40 percent reported stronger demand from small
firms. Furthermore, about half of domestic respondents noted increased
inquiries from potential business borrowers. Domestic banks that
had experienced an increase in demand pointed to greater customer financing
needs for inventories and accounts receivable as well as for investment
in plant and equipment. By contrast, foreign banks, on net, reported
decreased demand for C&I loans and indicated that customer borrowing
had shifted to other banks or nonbank lenders and that customers' internally generated funds had increased.

Commercial real estate lending. In the April survey,
11 percent of domestic banks, on net, said that they had eased lending
standards on commercial real estate loans, up a bit from the previous survey.
The percentage of domestic banks reporting increased demand for these loans
also increased in the current survey, rising to 22 percent, up from 16
percent in January. At foreign institutions, both commercial real
estate lending standards and loan demand were reportedly unchanged on net.

Lending to Households

(Table 1, questions 9-20)

Demand for residential real estate loans was little changed, on net,
over the three months ending in April. Lending standards for residential
real estate loans had been eased over the same period by about 8 percent
of respondents, on net, up somewhat from the previous survey.

The April survey asked banks about house price appreciation over the
past year in the markets they served. The responses were fairly diverse:
Nearly 30 percent of the respondents indicated that the average rate of
increase had been less than 5 percent, around half of them reported a rate
between 5 percent and 10 percent, and the rest pointed to home price appreciation
of more than 10 percent. Regarding the future, the banks expected
price increases to moderate: Over 60 percent expected home prices to grow
less than 5 percent over the next year in the markets they serve, and almost
all the rest expected appreciation of 5 percent to 10 percent.

The current survey also contained several questions about loan-to-value
ratios for residential mortgage loans. Banks reported that about
85 percent of the first-lien mortgages that they originated over the past
year had loan-to-value ratios below 90 percent and only 3 percent had ratios
of 100 percent or more. About 80 percent of the volume of second-lien
mortgages and home equity loans that respondents had originated over the
past year were to customers with a ratio of total mortgage debt to home
value below 90 percent. Only 5 percent were to customers with indebtedness
ratios of 100 percent or more. Banks that had originated loans in
areas where home prices had been rising relatively quickly tended to have
originated more loans, especially second-lien and home equity loans, with
lower loan-to-value ratios than banks that operated in markets with slower
appreciation. Indeed, at banks serving markets in which home prices
rose 5 percent or less, 7 percent of second-lien mortgage and home equity
loan originations were to borrowers with ratios of total mortgage debt
to home value of 100 percent or more and 76 percent of originations were
to borrowers with ratios of 90 percent or less. By comparison, at
banks originating loans in areas where homes had appreciated between 10
percent and 20 percent, these shares were 1 percent and 88 percent respectively.

In April, banks continued to indicate, on net, that they had become
more willing to make consumer installment loans, although they reported
that lending standards and most lending terms for consumer loans were basically
unchanged. Banks did, however, report having reduced the extent to
which consumer loans other than credit card loans were granted to customers
who did not meet credit-scoring thresholds. Of the respondents, 21
percent reported that demand for consumer loans of all types had strengthened
over the past three months. By contrast, in the January survey, 13
percent of respondents, on net, indicated that demand had weakened.

Net Interest Margins

(Table 1, question 21; Table 2, question 9)

Special questions in the April survey asked banks how they had changed
their investment and pricing behavior in response to the historically low
level of short-term interest rates and to resulting pressure on their net
interest margins. On net, domestic banks indicated that these factors
had not led them to change their desired levels of either credit risk or
interest rate risk. However, 22 percent of domestic banks, on net,
indicated that they had increased fees charged to borrowers and depositors.
About 20 percent of foreign banks, on net, reported that they had taken
on more credit risk.

This document was prepared by Mark Carlson and Fabio
Natalucci with the research assistance of Jason Grimm, Division of Monetary
Affairs, Board of Governors of the Federal Reserve System.